Key issues for the sustainable markets group

Business and Sustainable Development

IIED’s work on Business and Sustainable Development uses research projects, partnerships and capacity-building initiatives to build an understanding of where and how business can best contribute to sustainable development in middle and low income countries.

The business and sustainable development theme was established in 2005 as a successor to IIED’s Programme on Corporate Responsibility for Environment and Development (CRED).

We currently work on four topics:

• Business and sustainable local development

  Businesses have substantial potential to contribute to sustainable development at the local level. But how should businesses engage with local communities and policy-makers for sustainable development goals? How can corporate social investment strategies meet community development needs? And how can multi-stakeholder partnerships and dialogue be most effective at local level? These key questions guide our project work under this topic.

  We want to catalyse learning and partnerships that can get businesses working as real ‘local development actors', or that can see NGOs learning how to apply business skills in market settings - with our goal sustainable development at the local level.
   

• Standards and tools for sustainable development

  Getting the right standards and tools in place to support and promote responsible business practices is important. Codes of conduct, ethical management systems, and various kinds of ‘social and environmental responsibility' standards for businesses are burgeoning. But who wins and who loses as these tools and standards hit real-world markets and impact on producers in poorer countries?

  IIED works to understand the implications of existing standards and tools for stakeholders based in middle and low-income countries - particularly smaller producers. We want to shape standards and tools that can maximise positive business practices. We aim to do so in ways that are better attuned to sustainable development outcomes and to the concerns of stakeholders based in middle and low income countries.
   

• Direct investment and sustainable development

  Direct investment has the potential to make a major positive contribution to sustainable development. But benefits that are promised at national level are too often not matched by positive contributions to environmental protection, poverty reduction or sustainable livelihoods at the local level. IIED works to find ways to strengthen positive environmental, social and economic outcomes from direct investment.
   

• New Business Models for sustainable development

  This new initiative builds on IIED's work from across a range of industries, sectors, products and supply chains. It looks at how businesses and enterprises contributions to sustainable development are affected by the business model they adopt - including how they interact with each other in procurement, sub-contracting and other direct business arrangements. It explores how private sector, civil society and government can work together to shape business models that deliver positive economic, environmental and social outcomes as well as business viability.

All of our work reflects IIED’s longstanding concern to make sure that the interests of stakeholders based in middle and low-income countries have a real impact in shaping responsible business practices for sustainable development. We also place particular emphasis on the public policy underpinnings of responsible business practice and corporate accountability.

IIED’s work on business and sustainable development has focused on natural resource-based sectors. We have particular expertise within the team on food and agriculture, energy and extractive industries. We also often draw in wider sectoral expertise through collaboration with IIED colleagues working on tourism and on forestry and land use.

IIED staff are also active advocates in the broader agenda for change related to business and sustainable development.

See also: History of IIED's work on business and sustainable development

Environmental Economics

Environmental economics has historically formed a large part of iied’s work. The need to tackle incentives facing market actors has been a consistent message from iied research and environmental economic tools have been important in driving the sustainable markets agenda.

Within the Sustainable Markets Group, the economics side of our work focuses on two distinct areas:-

How to recognise and address market failure
Goal
Better recognition and quantification of market failures that affect the environment, and incentive mechanisms that are designed to correct adverse social and environmental outcomes.

Background and context
Many environmental problems such as climate change, pollution, land degradation and biodiversity loss are in part the result of market failures. These market failures are present in most sectors of the economy, including agriculture, forestry, extractive industries, manufacturing and tourism.

Those towards the end of a lifecycle chain of a product or service are rarely negatively affected by the impacts their sector has on environment and society. They therefore have little incentive to take account of these impacts (environmental or social externalities) in their decision-making. As a result the market rarely incorporates true costs of environmental or social externalities.

Incentives need realigning to ensure positive sustainable development outcomes. Through identification and measurement of these market failures, market-based solutions can be designed. The conventional way to address failures is through regulation to restrict certain types of economic activity and land uses, prevent polluting emissions, and ban certain types of trade such as in wild species. Yet such regulation is too often a blunt ‘stick’ that requires reinforcement from complementary incentive-based policy instruments.

Incentive mechanisms are increasingly being tested in developing countries to address provision of ecosystem services, particularly payments for environmental services (PES) and land-based carbon projects. Other approaches to changing incentives include certifying environmentally-friendly products to tap into consumer willingness-to-pay for these attributes and so provide an incentive for producers; and ecotourism that is either community-based or involves benefit-sharing to give local communities a stake in conserving critical habitats and species. With the momentum in international climate change negotiations around reducing emissions from deforestation and forest degradation (REDD+), there is now also increasing attention to PES as a means for reducing greenhouse gas emissions.

Current projects
Biodiversity and REDD
The role of economic instruments in policy mixes for biodiversity conservation
Paying local communities for ecosystem services: the chimpanzee corridor, Uganda
Using carbon finance to stop deforestation, Cat Tien, Vietnam
Sustainable tourism in Cambodia
Poverty and sustainable development impacts of REDD
PES work

The economics of climate change
Goal
Supporting climate change action and policy in developing countries by focusing the analysis of climate change impacts and the value of adaptation on specific countries and hotspots within selected countries.

Background and context
The recognition of climate change as the biggest threat to human welfare has added an economic dimension to the global, national and local agenda that cannot be ignored. The world’s poorest people are already experiencing climate-related impacts. Their efforts to adapt to these are limited by their low adaptive capacity, including limited financial resources. Yet global climate change policy processes remain unclear on the level and nature of financial support available for adaptation. The most urgent activities proposed by the least developed countries (LDCs) are taking time to be implemented despite their low cost. The key issues are availability of funding and approaches for deploying adaptation funds to where they are most needed.

Debates on how the expected (but extremely limited) official adaptation funds will be channelled to beneficiaries are taking place at global levels but they do not reflect local realities and the urgent needs of the most vulnerable people. Early adaptation will involve addressing existing impacts of climate variability and building the poor’s capacity deal with future change. Early actions and pilot schemes provide a solid basis for learning and scaling-up actions for wider reach.

Several developing countries are exploring the opportunities and options for low-carbon growth. Such growth will be most useful if it targets the poor, helping countries meet other development priorities, such as the Millennium Development Goals (MDGs). Climate change market mechanisms, such as carbon markets, tend to evade the LDCs. Even so, they could potentially generate development and adaptation co-benefits. The lack of clear signals from global climate talks also creates uncertainty in climate markets.

Economic data on climate change, its impact on behaviour and shifting this behaviour positively is also weak. While mitigation is being tackled through market and non-market instruments such as carbon trading, adaptation, which will be required to safeguard the welfare of the poorest people, is more complex. Traditional economic stimuli that can be applied to achieve mitigation targets will not necessarily work, as the activities of the poor are mostly missing from systems that account for economic activity. Thus, valuation of the impacts of climate change, and costs and benefits of adaptation are unlikely to reflect the realities of poor and vulnerable people. There is, therefore, a risk that policies and investments will leave the poor to suffer from the impacts of climate change despite the huge global momentum. These challenges will require different economic approaches that not only analyse economic consequences of suggested action, but approaches that stimulate action by governments, donors, businesses and individuals to address climate change.

Current projects
The informal economy
Economics of climate change in the water sector
CBNRM and climate change
Costing and planning of agriculture's adaptation to climate change

Market Governance

IIED's work in this area aims to examine the implications of changing market structures, to understand the contribution of both large companies and small producers and SMEs to sustainable development and to explore appropriate policy interventions that will enhance the sustainable development impact of both sets of players.

Increasing market concentration raises concerns about the power wielded by large corporations as they expand their market share. At the same time small producers and enterprises find it difficult to gain access to or maintain their share of markets. IIED has long recognised the important contribution of small and medium sized enterprises (SMEs) and local entrepreneurs to peoples' livelihoods and social networks in middle and low income countries Our proposed work aims to examine the implications of changing market structures, to understand the contribution of both large companies and small producers and SMEs to sustainable development and to explore appropriate policy interventions that will enhance the sustainable development impact of both sets of players.

Direct Investment

Direct investment has the potential to make a major positive contribution to sustainable development. But benefits that are promised at national level are too often not matched by positive contributions to environmental protection, poverty reduction or sustainable livelihoods at the local level.

IIED works to find ways to strengthen positive environmental, social and economic outcomes from direct investment.

An example of the work we do on this issue is our recent study of foreign direct investment and resource nationalisation.

Foreign direct investment and resource nationalism

Foreign direct investment is often characterised as an attempt to annex the resources of a foreign country - as terms such as "land grab" bear out. Host countries are increasingly responding with counter-measures to protect sovereignty over national assets - a phenomenon known as resource nationalism. Consumer countries too are adopting various mechanisms of resoruce nationalism to protect claims to critical resources, particularly oil and gas. The report Resource nationalism and sustainable development: a primer and key issues by Halina Ward  provides a conceptual, legal and practical overview of the many manifestations of resource nationalism and considers how resource nationalism contributes to, or detracts from, sustainable development. 

Energy

The world is facing an energy crisis with major global and local implications. Heavy, inefficient energy use has exacerbated global climate change, affecting some of the most vulnerable communities. Fluctuating oil prices and concerns about peak oil and energy security have will impact not only on Western consumers but also on millions of people in low-income countries who rely on oil for agriculture, transport and energy.

For the world's poorest, access to sustainable, healthy sources of energy is a basic critical need. Vast renewable energy resources are available but under-exploited in some of the poorest countries while oil and gas exploration and production continue – in increasingly sensitive environments. At the same time, large-scale biofuel production is being considered as an alternative to oil and gas, raising further concerns about land-use conflict and food security.

Energy, ecosystems and livelihoods are interdependent. Thus, energy issues need to be addressed holistically and through engagement with multiple stakeholders - government, industry, donors, civil society and local consumers. We aim to do this in our programme of work on energy.

We currently focus on two key areas:

• Governance of large-scale energy sector development (oil, gas, biofuels)
• Models for delivery of sustainable decentralised energy services.